Company voluntary arrangements (CVAs) can save jobs in the short term, but some argue they present creditors with an unfair ultimatum and are often doomed to fail. Drapers looks at the arguments for and against going down this controversial route.
The case for CVAs
CVAs have become a theme for bricks-and-mortar retailers in recent weeks, as both BHS and Beales turned to them as a method for restructuring their businesses. The practice is controversial, yet many people in the industry are in favour of CVAs in principle, for a variety of reasons. Perhaps the simplest is that CVAs can save a business and, by extension, jobs. BHS employs around 8,500 people, Beales around 3,000 directly and in concessions, and Austin Reed Group, which proposed a CVA in January 2015, employed just under 1,000, Companies House filings showed in October 2015.
“There’s no point shutting things down straight away if there’s a possibility a CVA will work,” says Tony Shiret, retail analyst at Chinese investment company Haitong Securities. “From the point of view of employees, they can be the best option in a difficult situation.”
“CVAs are a genuine attempt to broker a position that has an upside for both parties”
For landlords, CVAs are often seen as a more favourable option than the alternative: administration. In an administration, there is no obligation to negotiate with unsecured creditors, which usually receive only a fraction of what they are owed.
“Administrations are often worse for landlords,” says Julie Palmer, partner at business-restructuring firm Begbies Traynor. “When the insolvency practitioner files notice to appoint administrators, there is a moratorium on any enforcement action for 10 days, and this can be extended with the consent of the court. Typically landlords are not paid any rent during that period – and they can’t enforce it. At least a CVA is getting on with it and trying to preserve as much as possible of the business. It is a genuine attempt to broker a position that has an upside for both parties.”
Will Wright, restructuring partner at KPMG, supervised BHS’s CVA last month. He says: “The proposal process gave both the company and its creditors the opportunity to agree a compromise that is mutually acceptable.”
Palmer goes a step further and points out that CVAs can be a good negotiating tactic for retailers: “It’s a way of driving down rents. CVAs are not necessarily good news for landlords but they don’t want to find themselves with vacant units and all the costs that go with it.”
Another advantage of CVAs is transparency.
“Landlords know exactly the parameters within which they are working,” says Melanie Leech, chief executive of the British Property Federation.
Tony Devlin, head of UK retail agency at property services company CBRE, agrees: “Everybody knows what’s going to happen – they know the process, what they’re in for. It is more open than a standard administration.”
The case against CVAs
Although in comparison with administrations, CVAs may seem like the lesser of two evils, they are not without their drawbacks. Many creditors feel that retailers have them over a barrel.
One supplier to BHS recently told Drapers he felt obliged to vote in favour of its CVA: “If we don’t support them, then they’ll go into administration. If we do then we’ll lose money. We have no option.”
Devlin believes some of BHS’s landlords would have liked to have voted against the CVA and replaced it with new tenants while the market is buoyant, but were too scared to stick their heads above the parapet: “BHS could go into administration in 18 months, by which time the market might be in a completely different place. We may have gone through a Brexit – people may be nervous,” he points out.
Some argue that retail CVAs are prone to failure, pointing to examples such as JJB Sports, outdoor clothing retailer Blacks and DIY chain Focus, all of which went into administration post-CVA. As such, they see a CVA as a stay of execution rather than a solution – and one that creates more uncertainty for staff.
“I’m not sure they’ve had a successful record,” says Shiret. “Normally retailers struggle because the format is not strong enough to survive, not because the rent is a killer. With the shift in the market to online, some of these property-based CVAs are delaying the inevitable. What people really need is to step away and make a longer-term appraisal of the business.”
Palmer agrees that there is always a degree of scepticism about a CVA’s chance of success: “If you have two competing businesses, and one is in a CVA and one isn’t, which will you engage with? Retail is a bit different because shoppers like a bargain, so it might even be an incentive – they may think they’ll get a bargain. But it can work negatively in the longer term.”
Devlin points out that CVAs are simply another insolvency method: “Whether a pre-pack administration or a CVA, it’s the existing ownership that runs the business. Unless there is fresh capital to inject into the business, in my view it will always fail.” Going back to the example of BHS, he points out that a CVA usually slims down a business, which means it no longer has the same scale – or margins. As a result, it starts down a slippery slope to administration, unless it receives significant investment.
Leech agrees: “While a CVA can help alleviate some of the short-term pressures on a company, it is imperative that the owners then raise capital to reinvigorate it.”
What is a CVA?
- If your company is insolvent, you can use a company voluntary arrangement (CVA) to pay creditors and continue trading.
- You can only get a CVA through an insolvency practitioner. Within a month of being appointed, they will work out how much you can pay and a payment schedule.
- They will invite creditors to a meeting to vote on it. A CVA must be approved by creditors who are owed at least 75% of the debt.
- If approved, the business will be solvent and can start trading again. If it fails to make its scheduled payments, any of the creditors could apply to wind up the business.
- If a company does not get a 75% vote from creditors, it could face voluntary liquidation.